Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Figure 3.22
Triple top and triple bottom.
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CHART PATTERN ANALYSIS
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Figure 3.23 shows a typical head and shoulder formation con-
sisting of three peaks and two valleys with the highest peak in the
middle.
The head and shoulder formation is completed if the neckline
from valley 2 to valley 4 is broken on a close basis. After a breakout,
the initial prof it target is the distance from the lowest valley to the
highest peak of the head and shoulder formation.
Three Falling Peaks or Three Rising Valleys
The formations of the three falling peaks or the three rising valleys
are seldom recognized although they have a clear structure and high
analytic value (see Figure 3.24).
We get a short signal if the market closes below the second val-
ley, which is located between the second and third peak. We get a buy
signal if the market closes above the second peak, which is located be-
tween the second and third valley. As the initial prof it target after a
Figure 3.23
Head and shoulder formation.
Figure 3.24
Three falling peaks formation and three rising valleys formation.
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BASIC PRINCIPLES OF TRADING STRATEGIES
short signal, we can take the distance between the highest peak and
the lowest valley. This chart formation works equally well for buy and
sell signals.
Key-Reversal Day
To identify a key-reversal day, we need fast-moving markets either up
or down, based on continuing good or bad news.
After a strong bull market that carries a product into new high
territory, there are no more trend or resistance lines, but many in-
vestors have huge open prof its in their accounts. If there is any bad
news, there will be panic selling to protect at least part of the open
profits. These price moves can be extreme in products with limit up or
limit down facilities (see Figure 3.25).
The other formations where key-reversal days can be important
are false breakouts, especially in combination with triple top and triple
bottom formations. If in a triple top formation, the third peak is a false
breakout, this will show up many times in a key-reversal day.
Chart patterns can pinpoint major trend changes in the markets.
In addition, some price patterns can identify trend moves that are only
interrupted for a short sideward interval and then continue in the
original trend direction. Price patterns of the latter type are the so-
called continuation patterns.